Wednesday, November 13, 2013

A New Tax Law May Help Families Avoid Uncapping on Certain Inter-Family Real Property Transfers

By Judy Fertel Layne

Effective December 31, 2013, a parent can transfer residential real estate located in Michigan to his or her child without uncapping the taxable value of the property if the child continues to use the property for residential purposes. Subject to several exemptions, the Michigan General Property Tax Act provides that upon a transfer of ownership of real property, the property’s taxable value is increased to the property’s state equalized value, causing the new owner’s property taxes to increase. Historically, this included transfers of residential real estate from parent to child. This often created a hardship for children inheriting a family residence, including a family cottage that had been owned by the family for decades, because the property’s real estate taxes could increase dramatically upon the transfer. As a result, the Michigan Legislature recently created a new exemption from the definition of “transfer of ownership” to exclude “a transfer of residential real property if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.” MCL 211.27a(7)(s). Accordingly, a child can now receive residential real property from his parent, by gift or inheritance, without fear that the real estate taxes will increase meaningfully.

While this change to the statute will be good news for many families who wish to keep vacation or other residential property in the family for generations, the statute, as currently drafted, is not as flexible as some families may desire. The statutory language makes it clear that the property must pass from parent to child. Property held in a parent’s trust is not included.1 Because this will create planning problems for many families, the probate bar is currently pressing the Legislature to broaden the statute to include transfers from a trust. In addition, the Michigan Department of Treasury may create regulations that will establish that a transfer from a trust would fall within the exemption.

Families wishing to take advantage of this new law should be mindful of the statutory language as it currently exists and as it may be modified in the future to make sure that any proposed transfer falls within the exemption. In addition to the limitation on transfers from trust, the exemption only applies to a transfer if the transferee is related to the transferor by blood or affinity “to the first degree.” As a result, a transfer to the transferor’s grandchild would not fall within the exemption. Because of these traps for the unwary, families may wish to seek guidance from counsel prior to transferring residential real estate within the family.

1Indeed, the statutory language can even be read to imply that a transfer from a parent’s estate would not qualify, though this would surely defeat the purpose of the statute.